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Minyan Mailbag - "Real" Estate


Kenyan Martin?


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Hi John,

Your thoughts on Kmart (KMRT:NASD) are spot on. I was thinking yesterday that the market loved KMRT when it sold its real estate to Sears (S:NYSE) and seems to love it again even though KMRT implicitly is buying back that same real estate at even higher prices. This whole fascination with real estate reminds me of the late 80's valuation of Tokyo real estate. The value of real estate ultimately has to be tethered to the productive economic use of that land and/or building. Remember when the Imperial Palace in Tokyo supposedly was worth more than the whole state of California (or something like that, my memory is a bit fuzzy on the details)? There was no way that that piece of property in Tokyo was so special that it would lead to a productive use that could generate anywhere near that wealth.

Now economic output can be thought of in different ways in discussing real estate due to its different uses (residential, commercial etc.) but the overall point holds. In the case of Sears and KMART unless those assets were dramatically unproductive relative to their underlying capability there is no magic to the real estate. I just don't get it.

Minyan Bruce


KMRT is a phenomenon born of money and psychology. Quite simply, as money is being printed around the globe like never before, "cash" becomes dirt. Investors are awash in more and more cash that they have nothing to do with other than "risk" it by buying assets. Of course the normal process of rising interest rates that coincides with this printing of money has been arrested through a coordinated effort between primarily the Japanese and the U.S. central banks. Nominal financial asset prices are under pressure to ever rise until interest rates rise; as central banks keep the lid on these rates they only buy time: market pressures are building as we speak.

The Japanese unfortunately are between a rock and a hard place. The Chinese are able to diversify their foreign currency holdings while enjoying an ever increasing trade balance with the U.S. because their currency is only partially convertible (capital transactions cannot be converted). This relieves the Chinese from pressures to re-value and leaves the Japanese to do all the hard work: Japan is under immense pressure to continue to buy dollars and U.S. treasuries (they bought around $12 billion just yesterday) because they are still experiencing deflation and a stronger yen would kill their economy. But ironically they are not realizing the fruits of their labor: China is benefiting much more from trade than they are. I wonder when the Japanese MOF will wake up and smell the coffee?

Until then free money will abound and things like KMRT can exist.

Prof. Succo

position in kmrt, s

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